Greenbook/Tealbook

Prefatory Note The attached document represents the most complete and accurate version available based on original files from the FOMC Secretariat at the Board of Governors of the Federal Reserve System. Please note that some material may have been redacted from this document if that material was received on a confidential basis. Redacted material is indicated by occasional gaps in the text or by gray boxes around non-text content. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act.

Content last modified 02/09/2012.

Confidential (FR) Class III FOMC

August 4, 2006

CURRENT ECONOMIC AND FINANCIAL CONDITIONS Supplemental Notes

Prepared for the Federal Open Market Committee by the staff of the Board of Governors of the Federal Reserve System

Contents The Domestic Nonfinancial Economy ........................................................ 1 Employment Situation .....................................................................1 Motor Vehicle Production................................................................1

Tables Changes in Employment ..................................................................2 Selected Unemployment and Labor Force Participation Rates .......3 Production of Domestic Light Vehicles...........................................5

Charts Labor Force Participation Rate and Unemployment Rate ...............3 Persons Working Part Time for Economic Reasons........................3 Job Leavers Unemployed Less Than Five Weeks ...........................3 Inventories of Light Vehicles...........................................................5 Days’ Supply of Light Vehicles.......................................................5

The Domestic Financial Economy ...........................................................6

Table Selected Financial Market Quotations .............................................6

The International Economy ......................................................................7

Table Summary of U.S. International Transactions...................................8

Supplemental Notes The Domestic Nonfinancial Economy Employment Situation Employment on private nonfarm payrolls rose 113,000 in July. The increase was similar to the upward-revised average monthly increase of 99,000 in the second quarter and down from the 169,000 average of the first quarter. The unemployment rate moved up to 4.8 percent—0.1 percentage point above its second-quarter average—and the labor force participation rate held steady at 66.2 percent. In July, jobless rates for younger workers, which tend to be more variable, were somewhat higher than during the second quarter while rates of workers aged 25 and older were unchanged from their second-quarter averages. Employment in manufacturing fell 15,000 in July, although employment in the related industry of transportation and warehousing rose 10,000. The construction industry added 6,000 jobs, with virtually all the strength continuing to come in the nonresidential components. Employment in retail trade was unchanged in July after three months of substantial decline. Employment in services continued to increase, with computer services, engineering services, and accommodations displaying particular vigor. Government employment was unchanged, on net, despite another increase in federal employment. Employment at state and local governments, which had risen relatively strongly in the first quarter, declined in July, and the increases in May and June are now reported to have been much smaller than previously estimated. The average workweek remained at 33.9 hours in July. Aggregate hours of production or nonsupervisory workers rose 0.1 percent and were 0.3 percent (not at an annual rate) above their second-quarter average. With the revisions to earlier months, the rise in this measure of aggregate hours for the second quarter was revised up slightly to an annual rate of 2.6 percent. Average hourly earnings of production or nonsupervisory workers on private nonfarm payrolls rose 0.4 percent in July, close to the average monthly increase in the second quarter. For the twelve months ending in July, average hourly earnings increased 3.8 percent, up from the 2.9 percent pace of the preceding twelve months. Motor Vehicle Production On August 4, industry production plans for the third quarter were reduced by 100,000 units (annual rate), to 11½ million units. For July, scheduled production was cut quite -1-

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Changes in Employment (Thousands of employees; seasonally adjusted) 2005 Measure and sector

2005

Q4

2006 Q1

Q2

May

Average monthly change Nonfarm payroll employment (establishment survey) Private Natural resources and mining Manufacturing Construction Wholesale trade Retail trade Transportation and utilities Information Financial activities Professional and business services Temporary help services Nonbusiness services1 Total government Total employment (household survey) Memo: Aggregate hours of private production workers (percent change)2 Average workweek (hours)3 Manufacturing (hours)

June

July

Monthly change

165 152 4 -6 25 7 13 6 -1 12 41 14 51 14 221

179 171 4 12 30 7 11 6 -2 17 41 18 44 8 115

176 169 6 1 26 13 2 4 2 20 26 -8 69 7 287

112 99 5 10 1 9 -28 12 -4 9 38 0 47 13 241

100 94 2 -10 -4 9 -35 13 -9 7 65 17 57 6 288

124 109 5 22 -4 8 -4 8 -1 -5 37 -10 44 15 387

113 113 7 -15 6 1 0 11 -9 6 43 -2 63 0 -34

2.3 33.8 40.6

2.1 33.8 40.9

3.0 33.8 41.0

2.6 33.9 41.2

-.1 33.8 41.2

.4 33.9 41.3

.1 33.9 41.5

1. Nonbusiness services comprises education and health, leisure and hospitality, and "other." 2. Establishment survey. Annual data are percent changes from Q4 to Q4. Quarterly data are percent changes from preceding quarter at an annual rate. Monthly data are percent changes from preceding month. 3. Establishment survey.

Changes in Private Payroll Employment

Aggregate Hours and Workweek of Production or Nonsupervisory Workers Thousands 500

500

Hours 35.0

2002 = 100 106

3-month moving average 400

400

300

300

200

200

100

100

104

Aggregate hours (right scale)

34.5

102

July July 0

34.0

100 98

0 96

-100

-100

-200

-200

-300

-300

-400

1998

2000

2002

2004

2006

-400

Workweek (left scale)

33.5

94 92

33.0

1998

2000

2002

2004

2006

90

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Selected Unemployment and Labor Force Participation Rates (Percent; seasonally adjusted) 2005 Rate and group

2006

2005

Q4

Q1

Q2

May

June

July

Civilian unemployment rate Total Teenagers 20-24 years old Men, 25 years and older Women, 25 years and older

5.1 16.6 8.8 3.8 4.2

5.0 16.1 8.5 3.7 4.2

4.7 15.5 8.1 3.6 3.9

4.7 14.7 8.1 3.6 3.8

4.6 14.0 8.1 3.7 3.8

4.6 15.4 7.9 3.5 3.7

4.8 15.5 8.5 3.6 3.8

Labor force participation rate Total Teenagers 20-24 years old Men, 25 years and older Women, 25 years and older

66.0 43.7 74.6 75.4 59.4

66.1 43.4 74.8 75.3 59.6

66.0 43.7 74.0 75.5 59.4

66.1 43.8 74.2 75.5 59.5

66.1 43.5 74.5 75.5 59.4

66.2 44.5 74.1 75.4 59.7

66.2 44.0 74.5 75.3 59.9

Labor Force Participation Rate and Unemployment Rate

Percent 67.6 67.4

Percent 7.0

Participation rate (left scale)

6.5

67.2

6.0

67.0 66.8

5.5

66.6

5.0

66.4

July

66.2 66.0

4.0

Unemployment rate (right scale)

3.5

65.8 65.6

1996

1997

1998

1999

2000

2001

2002

Persons Working Part Time for Economic Reasons Percent of household employment 4.0

0.35

3.5

3.5

0.30

3.0

0.25

2.5

0.20

2.0

0.15

3.0

July

2.5

1996

1998

2000

2002

2004

2003

2004

2005

2006

3.0

Job Leavers Unemployed Less Than 5 Weeks

4.0

2.0

4.5

2006

3-month moving average

Percent of household employment 0.35

0.30

July

0.25

0.20

1996

1998

2000

2002

2004

2006

0.15

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dramatically (by 800,000 units) and now stands at an annual rate of about 10.9 million units; however, much of this shortfall in production will be made up later in the third quarter. GM reportedly experienced some unplanned start-up delays last month in the assembly of its redesigned line of pickup trucks.

-5Production of Domestic Light Vehicles (Millions of units at an annual rate except as noted) 2006 Item

2005

U.S. production1 Autos Light trucks

Q1

Q2

Q3

May

June

July

Aug.

11.5 4.3 7.2

11.2 4.5 6.7

11.1 4.3 6.8

11.1 4.5 6.5

10.9 4.3 6.5

11.3 4.1 7.1

10.5 4.4 6.0

11.2 4.5 6.6

Days’ supply2 Autos Light trucks

69 52 81

69 53 80

74 54 90

n.a. n.a. n.a.

74 55 88

75 55 90

n.a. n.a. n.a.

n.a. n.a. n.a.

Inventories3 Autos Light trucks

3.04 .93 2.11

3.01 .99 2.03

3.05 .95 2.09

n.a. n.a. n.a.

2.98 .96 2.01

3.05 .95 2.09

n.a. n.a. n.a.

n.a. n.a. n.a.

Memo: U.S. production, total motor vehicles4

12.0

11.7

11.6

11.5

11.3

11.6

10.9

11.6

Note. FRB seasonals. Components may not sum to totals because of rounding. 1. Production rates for the third quarter reflect the latest industry schedules. 2. Annual and quarterly values are calculated with end-of-period stocks and average reported sales. 3. End-of-period stocks. 4. Includes medium and heavy trucks. n.a. Not available.

Inventories of Light Vehicles Millions of units 2.5 June Light trucks

2.0

1.5 Autos June

1998

1999

2000

2001

2002

2003

2004

2005

2006

1.0

0.5

Days’ Supply of Light Vehicles Days 120 100 Light trucks

June 80

June

60

Autos 40

1998

1999

2000

2001

2002

2003

2004

2005

2006

20

The Domestic Financial Economy

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Selected Financial Market Quotations (One-day quotes in percent except as noted) 2004

2005

Change to Aug. 3 from selected dates (percentage points)

2006

Instrument June 28

Dec. 30

June 28

Aug. 3

2004 June 28

2005 Dec. 30

2006 June 28

1.00

4.25

5.00

5.25

4.25

1.00

.25

1.36 1.74

3.99 4.22

4.88 5.10

4.98 4.99

3.62 3.25

.99 .77

.10 -.11

Commercial paper (A1/P1 rates)2 1-month 3-month

1.28 1.45

4.23 4.37

5.26 5.37

5.29 5.37

4.01 3.92

1.06 1.00

.03 .00

Large negotiable CDs1 3-month 6-month

1.53 1.82

4.49 4.65

5.47 5.58

5.44 5.50

3.91 3.68

.95 .85

-.03 -.08

Eurodollar deposits3 1-month 3-month

1.29 1.51

4.36 4.52

5.34 5.48

5.38 5.47

4.09 3.96

1.02 .95

.04 -.01

Bank prime rate

4.00

7.25

8.00

8.25

4.25

1.00

.25

Intermediate- and long-term U.S. Treasury4 2-year 5-year 10-year

2.88 3.97 4.90

4.43 4.35 4.47

5.32 5.20 5.32

5.00 4.87 5.01

2.12 .90 .11

.57 .52 .54

-.32 -.33 -.31

U.S. Treasury indexed notes 5-year 10-year

1.56 2.25

2.03 2.10

2.60 2.68

2.29 2.37

.73 .12

.26 .27

-.31 -.31

Municipal general obligations (Bond Buyer)5

5.01

4.38

4.68

4.49

-.52

.11

-.19

Private instruments 10-year swap 10-year FNMA6 10-year AA7 10-year BBB7 5-year high yield7

5.21 5.30 5.59 6.18 8.30

4.92 4.82 5.25 5.84 8.28

5.80 5.55 6.19 6.76 8.81

5.54 5.36 5.90 6.46 8.62

.33 .06 .31 .28 .32

.62 .54 .65 .62 .34

-.26 -.19 -.29 -.30 -.19

Home mortgages (FHLMC survey rate) 30-year fixed 1-year adjustable

6.21 4.19

6.21 5.16

6.78 5.82

6.63 5.69

.42 1.50

.42 .53

-.15 -.13

Short-term FOMC intended federal funds rate Treasury bills1 3-month 6-month

Record high

2005

Change to Aug. 3 from selected dates (percent)

2006

Stock exchange index Dow Jones Industrial S&P 500 Composite Nasdaq Russell 2000 Wilshire 5000

Level

Date

Dec. 30

June 28

Aug. 3

Record high

2005 Dec. 30

2006 June 28

11,723 1,527 5,049 782 14,752

1-14-00 3-24-00 3-10-00 5-5-06 3-24-00

10,718 1,248 2,205 673 12,518

10,974 1,246 2,112 688 12,554

11,243 1,280 2,092 704 12,826

-4.10 -16.18 -58.56 -9.91 -13.05

4.90 2.56 -5.12 4.63 2.46

2.45 2.75 -.92 2.37 2.17

1. Secondary market. 2. Financial commercial paper. 3. Bid rates for Eurodollar deposits collected around 9:30 a.m. eastern time. 4. Derived from a smoothed Treasury yield curve estimated using off-the-run securities. 5. Most recent Thursday quote. 6. Constant-maturity yields estimated from Fannie Mae domestic noncallable coupon securities. 7. Derived from smoothed corporate yield curves estimated using Merrill Lynch bond data. _______________________________________________________________________ NOTES: June 28, 2004, is the day before the most recent policy tightening began. June 28, 2006, is the day before the most recent FOMC announcement. _______________________________________________________________________

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The International Economy U.S. International Financial Transactions Foreign official flows into the United States (line 1 of the Summary of U.S. International Transactions table) moved up a touch in June, and the pace of official inflows for the first half of 2006 is well above the average pace of 2005. .

Official inflows from OPEC (line 1.b) picked up in June, as did inflows from other oil-producing countries including Mexico, Norway, and Russia. G-10 countries and the ECB (line 1a) continued to reduce their official holdings in the United States. .

Net private foreign purchases of U.S. securities (line 4) decreased slightly in June from May’s robust level. However, total second-quarter securities purchases were well below those of recent quarters because of very weak inflows in April. Flows into U.S. Treasury securities (line 4a) picked up considerably in June, although purchases for the first half of 2006 were noticeably lower than those recorded in recent years. Following extremely strong May inflows, private foreign purchases of agency bonds (line 4b) eased in June. Even with this easing, agency bond purchases in the first half of 2006 exceeded those recorded for all of 2005. Foreign purchases of corporate bonds in June (line 4c) maintained the robust pace of recent months, and were primarily recorded against the United Kingdom. Private foreigners on net sold corporate stocks in June (line 4d), and net purchases for the second quarter were nil. Because of strong purchases in the first quarter, however, stock inflows for the first half of 2006 remained sizable relative to historical levels. U.S. acquisitions of foreign securities (line 5) fell back in June, although purchases for the first half of 2006 were slightly above last year’s robust pace. Flows into foreign bonds (line 5a) eased, and on net there were minimal stock flows (line 5b). U.S. investors purchased a fair amount of European equities in June, but these purchases were offset by sales of Asian equities. There were strong net outflows recorded by the banking sector (line 3) in June after two months of net inflows. This volatility is not unusual, however, as the magnitude and direction of banking flows often vary significantly from month to month.

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